THE BLOG

29
Jan

DOL Prepares to Finalize Fiduciary Rule

fiduciary

Content provided by Mike Forker, CLS Chief Compliance Officer

The Department of Labor (DOL) has finalized their proposed fiduciary rule, which would impose a fiduciary standard on all advice given to retirement plans and IRAs.

This morning, the Office of Management and Budget (OMB) announced that they had received a final rule from the DOL titled “Conflict of Interest Rule—Investment Advice.”However, the final rule is not yet available to the public because the OMB has to conduct a cost-benefit analysis before the rule is published. While the OMB has up to 90 days for review, the DOL requested an expedited review, which means the review could take as little as 50 days.

Once the OMB has conducted their review, the final rule will be made available to the public. The DOL has previously indicated that once the final rule was announced, there would be an eight-month time period before it was effective.Stay tuned!Once the final rule is released CLS will be providing information on how the rule impacts financial advisors.

 

1059-CLS-1/29/2016

29
Jan

2015: A Look Back At Income-Producing Strategies

updown

Content provided by Case Eichenberger, CLS Client Portfolio Manager

2015 was no doubt a tough year for the stock market. In fact, the average investor lost about 3% for the year. While not even close to bear market territory, these are disappointing gains nonetheless. Of the major asset classes, only the S&P 500 had a gain above 1%, including dividends. Investors utilizing diversified income strategies likely did not fare any better, even with attractive yields offered by some areas of the market. Here’s a quick breakdown of some often-used areas of the market to grab yield:

  1. Large-Cap Value Stocks – These tend to trade at lower P/E ratios and have higher-than-average dividend yields. Investors looking for yield will tend to follow value stocks. This area, represented by IVE, an ETF that typically offers a higher yield than the S&P 500, performed much worse in 2015. It trailed the S&P (in total return, counting dividends) by more than 4%.
  2. International Value Stocks – Investors have shied away from international stocks for the last several years due to underperformance against U.S. benchmarks. But international stocks are offering higher dividends than the U.S. by about 1%! Not to mention the added benefits of potential risk reduction, lower correlation, and differing return streams. EFV, a proxy for developed international value stocks, underperformed U.S. benchmarks in 2015 largely due to the rising U.S. dollar against foreign currencies.
  3. Real Estate – This has always attracted investors due to the high income it must pay out. To qualify as a Real Estate Investment Trust (REIT), a real estate firm must pay 90% of its taxable income to shareholders as dividends. Represented by IYR, this sector performed very well in 2015, besting the S&P 500, but just barely.
  4. High-Yield Bonds – Corporate bonds rated below investment grade have always been popular investments of income-seeking investors. They tend to behave more like stocks than bonds and carry more credit risk, thus offering more yield than normal bonds. This area of the market had a rough year in 2015, mainly due to its energy exposure. Represented by JNK, a broad, high-yield ETF proxy, it was negative by just more than 6%.
  5. ­Investment Grade Credit Bonds – We finally get to boring old bonds. Bonds are the best diversifiers for stocks and pay coupons and interest to their investors. CRED, the ETF proxy for a core investment-grade corporate bond market has a higher yield than cash, but it performed negatively in 2015 by about 1%. That was mainly due to its longer duration and widening credit spreads.

So what are investors to do if they are looking for a higher yield than cash? Above are some frequently used options, but even some of the lowest risk options can return negative. Another option is to invest in a diversified fund or strategy, one that uses multiple asset classes to generate yield. Diversified options, such as the $75 billion Franklin Income Fund or the Multi-Asset Diversified Income ETF, are currently offering high yields of more than 5%, but these should not be confused with pure bonds funds. They are not without risks and they were also in the red in 2015. In fact, both were down by 7-8%.

Diversified approaches help ensure investors do not take an extraordinary amount of risk in any one asset class. But they do not protect investors from all risk, and declines can and will happen, even with the extra yield. The best option is to seek only the amount of yield necessary to generate and manage in a diversified way that withstands varying market cycles.

 

 

The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change.  No part of this report may be reproduced in any manner without the express written permission of CLS Investments, LLC.  Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such.  All opinions expressed herein are subject to change without notice.  This information is prepared for general information only.  It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report.  You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.  You should note that security values may fluctuate and that each security’s price or value may rise or fall.  Accordingly, investors may receive back less than originally invested.  Past performance is not a guide to future performance.  Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk.  These risks are in addition to any unsystematic risks associated with particular investment styles or strategies. CLS is not affiliated with any of the companies listed above. While some CLS portfolios may contain one or more of the specific funds mentioned, CLS is not making any comment as to the suitability of these, or any investment product for use in any portfolio.
At certain places, we offer direct access or ‘links’ to other Internet websites. These sites contain information that has been created, published, maintained or otherwise posted by institutions or organizations independent of CLS Investments, LLC (CLS). CLS does not endorse, approve, certify or control these websites and does not assume responsibility for the accuracy, completeness or timeliness of the information located there. Visitors to these websites should not use or rely on the information contained therein until consulting with their finance professional. CLS does not necessarily endorse or recommend any product or service described at these websites.
An ETF is a type of investment company whose investment objective is to achieve the same return as a particular index, sector, or basket. To achieve this, an ETF will primarily invest in all of the securities, or a representative sample of the securities, that are included in the selected index, sector, or basket.  ETFs are subject to the same risks as an individual stock, as well as additional risks based on the sector the ETF invests in. An income-generating asset is one which seeks to provide a return on investment by taking positions in various securities designed to grow principal.  Specific securities selected to achieve this goal may vary greatly.  Diversifiable risks do exist but vary based on the specific securities chosen.  One over-arching diversifiable risk is the liquidity risk. Yield is the income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value.

1053-CLS-1/28/2016

28
Jan

It’s Anchors Away at National LINC 2016

Today on the Orion Weekly, we're getting pumped up for TD Ameritrade National LINC 2016. You can also sign up for The Anchor Party next week, download a new Efficient Advisor newsletter, and let us know what billing features you'd like to see.

The post It’s Anchors Away at National LINC 2016 appeared first on Orion Advisor Services.

26
Jan

Software Release Spotlight: Best of the Rest

Learn more about recent updates to Report Builder, the Client Portal, and Engage in today's blog.

The post Software Release Spotlight: Best of the Rest appeared first on Orion Advisor Services.

25
Jan

January’s Market Volatility

Content provided by Case Eichenberger, CIMA, Client Portfolio Manager

What’s scaring market participants today? Will this be known as the China
scare of 2016? The oil crash of 2016?

It’s always hard to blame market turmoil on one event, but slowing global growth is usually a culprit. When combined with slumping demand for oil/an overabundance of supply, Fed tightening, and an election year, we have a lot of uncertainty. And markets hate uncertainty.

First, let’s review what we’ve seen. We are within the range of a normal market correction that typically occurs once per year. On average, peak-to-trough, the S&P 500 has experienced intra-year declines of 14%, in line with the current environment. The stock market doesn’t pay much attention to the calendar; just because this is occurring in January is more or less meaningless.

Typical stock market corrections between 10-20% take just four months on average to recover. And market corrections and volatility can create opportunity. For example, accumulation investors, who are adding money to accounts consistently, benefit from investing at more attractive price levels. Income-focused investors benefit from reinvesting, and all investors can benefit from opportunistic rebalancing.

Market Volatilities_US Equities

Volatility is the price of admission for financial markets. The decline we’ve seen this year feels more uncomfortable because of the speed at which it happened and because we’ve recently experienced historically low volatility. We expected volatility to rise, and it definitely has. CLS Chief Strategist, Scott Kubie, CFA, told Yahoo Finance recently:

“Volatility matters, because it is an emotional cost to investing that can lead to reduced performance. It also matters for fundamental reasons, because volatility often expresses—and magnifies—a real risk that could lower long-term returns.

“The good thing about corrections is they create opportunities. We are looking for asset classes where the selling pressure has pushed prices below fair valuations and where fundamentals are attractive. Most equity asset classes have fallen in line with their risk during the recent decline.

“CLS sees opportunity in rotating toward factor or smart-beta ETFs that offer exposure to the types of stocks that typically outperform in the long run. International markets that benefit from lower oil prices also provide potential price gains.”

And in the words of the well-respected investor Benjamin Graham:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

Day-to-day market actions are driven heavily by random noise and behavioral biases, causing dramatic over- and under-reaction to new information. In the long run, market performance reverts to fundamentals and valuations. Although CLS projects slower growth ahead, we are not anticipating a recession. And although energy companies may struggle, we foresee earnings growth turning around in 2016.

During the debt crises in 2011, the market was down about 20% during the year. As scary as that sounds, what have we seen since? 2011 ended about flat, before dividends, and the market has been up more than 70% since the pullback – still a very good time to be in stocks and not in cash.

In times of market crisis, we’re reminded that it pays to stay disciplined with asset allocations and diversify to a comfortable risk score.

CLS is watching these market occurrences every day in real time. We monitor each of our client’s accounts to make sure they are taking on the appropriate amount of risk they signed up for. If risk becomes too high or too low, we make allocation adjustments to maintain the level of risk our clients are comfortable with.

The views expressed herein are exclusively those of CLS Investments, LLC (CLS), and are not meant as investment advice and are subject to change. CLS is not affiliated with any companies listed above. No part of this report may be reproduced in any manner without the express written permission of CLS. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This material does not constitute any representation as to the suitability or appropriateness of any security, financial product or instrument. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not a guide to future performance. Individual client accounts may vary. Investing in any security involves certain non-diversifiable risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any specific, or diversifiable, risks associated with particular investment styles or strategies. The graphs and charts contained in this work are for informational purposes only. No graph or chart should be regarded as a guide to investing. 1035-CLS-1/25/2016
21
Jan

How to Save Time and Find the Right Custom Report

Watch today's Orion Weekly for Joe's Tech Tip about How to Save Time and Find the Right Custom Report.

The post How to Save Time and Find the Right Custom Report appeared first on Orion Advisor Services.

20
Jan

Large Caps vs. Small Caps Debate

Two piggy banks, one big and one small, on a bright blue background

Content provided by Paula Wieck, CLS Portfolio Manager

At the start of 2015, some market pundits doubted the ability of large-cap stocks to outperform small caps due to the strengthening dollar. Typically, dollar strength bodes well for small-cap companies because they do much of their business locally. Larger companies tend to do more business across borders, and dollar strength makes their goods more expensive to international consumers. The story was quite good, but investing is more than just buying a good story.

Despite dollar strength, large caps have outperformed small caps. Why? Historically, small-cap companies perform best when credit conditions are easing, not tightening. And, as we all know, conditions are likely to get tighter now that the Federal Reserve (Fed) has begun to raise rates. Small-cap companies tend to use more leverage (borrow money) in order to grow their companies. If the cost of borrowing increases, it will cut into small-cap companies’ profits and, possibly, growth potential. As a result, small-cap companies pose more of a credit risk; and as credit spreads widen (as they have done recently), investors tend to flock to the relative safety of larger-cap companies.

There are several other reasons why CLS favors large caps over small caps:

  • Large-cap equities have more attractive relative valuations than small caps; however, that valuation gap has narrowed recently, which warrants further monitoring.
  • Large-cap equities tend to have higher-quality characteristics, and higher-quality companies tend to do better in slow growth environments.

Large caps are one of the highest convictions at CLS. Currently*, CLS portfolios have an active overweight of 7.5% tilted to large-cap equities. And as you can see by the rectangle around “Large Cap,” we will continue to favor larger-cap names over the next 12 months.

paula chart

As of 12/31/2015. The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change.  No part of this report may be reproduced in any manner without the express written permission of CLS Investments, LLC.  Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such.  All opinions expressed herein are subject to change without notice.  This information is prepared for general information only.  It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report.  You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.  You should note that security values may fluctuate and that each security’s price or value may rise or fall.  Accordingly, investors may receive back less than originally invested.  Past performance is not a guide to future performance.  Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk.  These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.
Market capitalization, or market cap, refers to the total dollar value of all of an issuer’s outstanding shares of stocks. Generally, large cap firms consist of companies whose market cap is between $10 Billion and $100 Billion; mid cap securities generally consist of companies whose market cap is between $2 Billion and $10 Billion; small cap securities generally consist of companies whose market cap is between $300 Million and $2 Billion.  Additional diversifiable risks for mid cap companies include, but are not limited to, liquidity risk and business risk.  These two risks are present to an even greater degree for small cap firms. Valuation is the measurement of the current worth of an asset or company.  Relative valuation is a method of evaluating the financial worth of a company by comparing its value to the value of its competitors. There is no one single method to determine valuation.
0949-CLS-1/13/2016
19
Jan

Fuse 2015 Spotlight Series: Vestorly

Read today's blog entry to learn more about Fuse 2015 award winner Vestorly and their contribution to their Orion integration.

The post Fuse 2015 Spotlight Series: Vestorly appeared first on Orion Advisor Services.

14
Jan

Learn More about Insight and Get Caught Up on Login Activity

Catch up with the new Insight Dashboard, read more about new data queries, and say hello to a few award winning Orion employees.

The post Learn More about Insight and Get Caught Up on Login Activity appeared first on Orion Advisor Services.

13
Jan

The Key Principles to Managing Portfolio Risk

key

Content provided by Joe Smith, CFA, CLS Senior Market Strategist

Volatility has gradually picked up this year. This should be no surprise to investors since we have seen exceptionally low volatility over the last few years. Volatility inevitably reverts back to historical trends and should be expected to rise as markets focus on company-specific fundamentals and valuations.

So with that as a backdrop, what should investors keep in mind when thinking about risk and its impact on portfolios? At CLS, we believe in three key principles, which are at the heart of our disciplined investment process. Instead of focusing on asset returns, we start with asset risk.

Principle 1: Understand the Client’s Desired Risk Profile

What is a risk score? For many investors, it goes beyond measuring one’s tolerance for risk. It is a mechanism to determine the level of risk an investor is comfortable with over a stated investment horizon. This is the main principle behind CLS’s Risk Budgeting Methodology. In fact, recent academic research has shown this method is still the preferred way for individuals to make investment decisions.

Principle 2: Managing Volatility Within a Given Range

We all know returns go both ways: positive and negative. What is less discussed is the impact those returns have on aggregate wealth in a portfolio.

Say for instance a portfolio had a starting balance of $100,000 with an accumulation goal over the next 10 years. Assume Portfolio A was down -10% for the first year while Portfolio B was down only -9% that same year. Assuming each portfolio had the same return of 5% thereafter for the next nine years, what would be the difference in total wealth accumulated?

What we find is such a small difference in return in the first year could compound into meaningful differences in return (+1.6%) and ending wealth (Portfolio A would have $139,614 and Portfolio B would have $141,170). The point is simple: keeping more of what you earn matters.

Principle 3: Measure Outcomes Based on Their Probabilities

Investing, just like many things in life, is not a black-and-white activity. It requires understanding that each outcome is part of a greater machine called probabilities. Probabilities help investors translate uncertainty around what can’t be directly observed into expectations that help keep goals and emotions managed.

For example, as we look at 2016 we generally have a lower expectation for U.S. equity returns relative to other equity markets, investors must keep in mind that same baseline expectation has probabilities associated with it. Based on our current outlook, we believe the probability for equity returns to increase by 5-10% to be less than 17%. At the same time, we believe the probability for equity returns to fall in the range of 0-5% to be just above 21%. Such an exercise clearly helps investors focus on their long-term goals while also managing emotions for short-term expectations.

 

 

The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change.  No part of this report may be reproduced in any manner without the express written permission of CLS Investments, LLC.  Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such.  All opinions expressed herein are subject to change without notice.  This information is prepared for general information only.  It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report.  You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.  You should note that security values may fluctuate and that each security’s price or value may rise or fall.  Accordingly, investors may receive back less than originally invested.  Past performance is not a guide to future performance.  Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk.  These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.
A client’s risk budget is derived from the client’s specific answers to CLS’s Confidential Client Profile questionnaire, which establishes the client’s financial goals, ability to handle risk, and overall investment time horizon. The individual client risk budget is expressed as a percentage of the risk of a well-diversified equity portfolio.
 0951-CLS-1/13/2016